A recent Ninth Circuit decision clarified that the benefit to the class is the “touchstone for determining the reasonableness of attorneys’ fees in a class action.” Under this decision, the fee should not be based on the maximum potential class recovery (as some courts have held for many years), or a lodestar amount that bears no relationship to the actual class recovery. It will be interesting to see how this decision impacts settlement negotiations in putative class actions in the Ninth Circuit and beyond.

In Lowery v. Rhapsody International, Inc., — F.4th –, 2023 WL  3857499 (9th Cir. June 7, 2023), a putative class action was filed against a music streaming service, Rhapsody, on behalf of copyright owners whose music was played on the service without a license. About 98% of the putative class members accepted a settlement that was negotiated with the National Music Publishers Association outside of this case, leaving a small number of putative class members remaining. A settlement of this putative class action was negotiated early in the case. Under the terms of the settlement, putative class members were required to make claims to receive compensation, and the total amount potentially available was $20 million. But because so few claims were made (in large part because of the prior settlement), Rhapsody paid only $52,841.05 to the putative class. The plaintiffs’ attorneys nevertheless claimed $2.5 million in fees on a lodestar basis. A magistrate judge recommended a fee award of $860,000 but the district judge rejected that and awarded $1.7 million. These numbers surprise me given what the opinion says about how the settlement was reached early in the case, with most of the efforts focused on negotiating the settlement, not litigation activities. But the opinion doesn’t delve into how those large lodestar numbers were reached.

The Ninth Circuit reversed, instructing the district court on remand to determine the “actual value to the class members and then award attorneys’ fees proportional and reasonable to the benefit received by the class.” The court explained that “courts must consider the actual or realistically anticipated benefit to the class—not the maximum or hypothetical amount—in assessing the value of a class action settlement.” While a lodestar cross-check was appropriate, where the lodestar amount “will greatly exceed 25% of the value of the settlement … that is a major red flag that signifies that lawyers are being overcompensated and that they achieved only meager success for the class.” The court emphasized that “[t]he key factor in assessing the reasonableness of attorneys’ fees is the benefit to the class members.” The court noted that there may be some circumstances where other factors come into play, such as civil rights cases or even some copyright cases where there is a societal benefit or “substantial nonmonetary relief.” 

This is arguably something of a sea change for class action settlements. For many years, courts have regularly approved attorneys’ fee awards based on the maximum potential recovery. Some judges or commentators might assume that this will simply result in plaintiffs’ attorneys accepting lower compensation in lower value cases. But such deals are never easy to negotiate. The plaintiffs’ bar tries to get the same or better hourly rates as the defense bar. Will defendants be forced to pay more because that is the only way a settlement can be reached? Or will defendants force more cases through class certification, summary judgment or trial? Or will there be more settlements that include no agreement on the fee, instead having the court decide the fee on a disputed application? That can be risky for the defendant, but maybe not so much now in the Ninth Circuit. Will nonmonetary relief be negotiated and relied upon more often in seeking settlement approval? In my mind, all of these may happen depending on the circumstances of the case.